Warren Buffet popularized “moats” as competitive differentiators. if nobody crosses your moat, you win.
here are a few moats to consider developing at your company, and my predictions on their sustainability.
in real estate, the cash to start (e.g. buy a building) is where most aspiring property owners get stuck. but once you own a home or 10, it’s relatively easy to:
- acquire customers (Airbnb, Zillow, Craigslist)
- repair damages (property management services)
- scale (debt / leverage)
- stay compliant (inspectors, back office tools)
real estate is not a tough industry to be in, per se, but it is a tough industry to get into, thanks to the capital moat. if you’ve ever heard the phrase “the rich keep getting richer,” they do! thanks in part to real estate.
Ryan’s warning: access to capital is increasingly democratic. REITs also provide entry to real estate ownership at competitive returns with no cash minimums. within minutes of setting mine up i was a co-owner in 74 buildings.
there are a couple types of IP. a patent, trademark, or copyright is a legally enforced variant that makes it annoying for competitors to clone what works. at Fomo we have a few dozen pieces of such IP.
another type of IP is a trade secret, like the formula to Coca-Cola or an algorithm that increases a system’s efficiency.
the IP moat affords its creator “best at something” status by lending its creator “only at something” credentials.
Ryan’s warning: the essence of IP is innovation. thus the logical conclusion of protecting an “innovative way to do X” is someone else creating an even better way to do X. historians began documenting the fastest mile run in the 1850s. for 100 years, nobody could break 4 minutes. then Roger Bannister did it in 1954, followed by John Landy who beat Bannister’s record just 46 days later. will your invention defend you for 100 years, or 46 days?
society will pay credence to Steve Jobs, Elon Musk, Bill Gates, Jeff Bezos, and a handful of others for another millennia.
these entrepreneurs exemplify the operator moat, capitalizing on rare outlier abilities to execute on visions that change the world.
this strategy works because it relies on things that don’t change:
- most people are lazy
- most people are unwilling to delay gratification
- most people don’t believe in themselves
- most people procrastinate
when a software developer builds an app, they’ve immediately established a moat around 5 or 6 billion people who will never learn to code. not because they can’t, but because they won’t. too much negative self talk, too much inequality, too much circumstance.
innovation that spites expected human behavior is an unfair advantage because it bakes itself directly into the solution’s existence.
Ryan’s warning: an old saying about ancient empires is the “Sun never sets.” although we live in a post-conquest world, Amazon is arguably the new Roman Empire and legislators are beginning to notice.
someday, regulators may attempt to “correct for” asymmetrical operators by breaking up global corporations and catalyzing a return to localism. if that happens, it won’t matter if some one is capable of building a monopoly.
why moats matter
first, take a step back. moats don’t matter unless an enterprise intends to last.
the average company lifespan is 10 years, enough to take care of a family for a generation and make a few founders rich, with cash or stories or otherwise.
but if your enterprise intends to exist in, say, 50 years, a moat is not a nice to have. it’s a pre-requisite. look no further than Coca-Cola.
a layman says, “they just sell sugar water.” and they do sell sugar water. but they don’t “just,” and that is the entry point to understanding their moat. i won’t attempt to articulate Coke’s brand here, but a few things stick out:
- first to market (Pepsi will always be derivative)
- linked to American culture (most sought after “tribe” in the world)
- recipe is a secret (allegedly only 2 executives know it)
- enough capital to acquire would-be threats (which they’ve done 11+ times)
still think the strategy to beat Coke is with better quality sugar?
how to choose a moat
to find a focal point for your competitive advantage, work backwards.
- what barriers did you overcome to succeed in your industry?
- are those barriers becoming more or less relevant for new entrants?
- can you create a new barrier?
but maybe you just need to be first. maybe you should align with a shift in the culture. or maybe just stockpile cash, earn interest, then bet the farm when a market is vulnerable.
you can also refactor the above mentioned moats.
at Fomo, for example, we think
customers == IP. we’re betting that humans are loyal creatures (things that don’t change), high quality customer service builds great relationships (scarcer than money), and a bold vision makes operators interchangeable.
we don’t need the best pricing, the most funding, or a famous Gary Vaynerchuk figurehead to win market share, because we have a moat.
what do you have? choose wisely.